Ruhnn IPO: Internet Key Opinion Leader With Certain Risks

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About: Ruhnn Holding (RUHN)
by: Wilsonville Capital
Summary

Ruhnn Holding is an internet key opinion leader, "KOL". According to Frost & Sullivan, the company is the largest business of this kind in terms of revenue in China.

Revenue growth of 59% y/y is what investors should appreciate the most on this name.

The company does not report lot of cash, only $1.4 million cash and restricted cash of $3.08 million.

On the liabilities front, the company shows $81 million in total liabilities, which seems a bit worrying. It means that the asset/liability ratio is below one.

The company was incorporated in Cayman, where securities law is not that developed. As a result, shareholders may not be that protected.

With 59% revenue growth and gross profit of 32%, Ruhnn Holding (RUHN) should impress growth investors quite a bit. The company is developing a very innovative business model that combines the use of social media and artificial intelligence to improve the sale of products online. Both the market opportunity and the expected growth of the industry should benefit Ruhnn Holding.

Having mentioned this beneficial feature, value investors may not be interested in this company as it is still far from reaching break-even point. Furthermore, the fact that the company was incorporated in Cayman is not ideal. Keep in mind that the rights of shareholders are not clearly established as in the United States. Investors of any kind should understand this point very well before dealing with the shares.

Source: Prospectus

Source: Prospectus

Business

Based in China and incorporated in Cayman, Ruhnn Holding is an internet key opinion leader, "KOL". According to Frost & Sullivan, the company is the largest business of this kind in terms of revenue in China.

Take a look at some of the services offered by Ruhnn Holding:

Source: Prospectus

Ruhnn Holding seems to be quite an interesting partner for KOLs, fans and consumers, merchants, and social media players. Online retailers can increase awareness though several social media platforms using one single solution of Ruhnn. Suppliers can also improve their designs by using the feedback that Ruhnn obtains from KOLs, fans, and consumers. Many of the advantages of using the solutions are mentioned in the table below.

Source: Prospectus

The amount of social coverage reported by Ruhnn Holding seems massive. In December 2018, the company reported a total of 148.4 million fans across large social media platforms in China. In addition, Ruhnn seems to be China's largest internet KOL facilitator in e-commerce in terms of gross merchandise volume in 2018.

The image below provides a picture describing the operations of Ruhnn Holding. The company offers marketing and visibility to brands on the social media and obtains feedback from clients. As a result, online retailers are able to sell more goods.

Source: Prospectus

The market opportunity and the expected growth seem massive. In the period from 2013 to 2017, the market size for KOL facilitators grew at a CAGR of 172.9%. In the future, from 2017 to 2022, the market size is expected to increase at a CAGR of 38.9% amounting to $29 billion. The image below provides further details on the massive expected growth:

Source: Frost & Sullivan

Income Statement

Revenue growth is what investors should appreciate the most on this name. The company reported $137 million for the year ended March 31, 2018, 59% more than that in the same period in 2017. The most relevant revenue is made through the sale of products, $132 million. If that's not enough, after taking into account cost of services and cost of product sales, the gross profit is also large, $44.2 million.

Having mentioned these figures from the top of the P&L, the numbers in the bottom line are not that beneficial. In order to obtain an increase of 59% in the amount of sale, the company had to increase its general and administrative expenses by 95% and marketing expenses by 49%. It does not seem ideal. With these figures in mind, the company still seems far from breakeven point, which will make most value investors pass. In total, the loss attributable to Ruhnn Holding Limited was equal to $15 million.

Source: Prospectus

Balance Sheet: Inventory Is Large And Increasing

On the balance sheet front, investors may not appreciate the fact that as of March 31, 2018, the company does not report lot of cash; it has only $1.4 million in cash and $3.08 million in restricted cash. The most relevant asset is inventories worth $46.5 million, which the company increased by 36% in the last year. The inventories may not be ideal for certain investors as they represent 77% of the total amount of assets. If the company is not able to sell its inventory, it represents a serious risk. Keep in mind that perhaps these inventories cannot be sold later in 2020 or 2021. The image below provides the list of assets:

Source: Prospectus

Further investigation on the inventories seems very necessary. The company provides further details on the type of inventories owned:

"The Group purchases raw materials such as fabric and buttons from various suppliers and outsources them to third party manufacturing companies for production and processing." - Source: Prospectus

In addition, as of March 31, 2018, products ready to be sold represented 83% of the total amount of inventories, which means that the company reports a large amount of old inventory waiting to be sold.

Source: Prospectus

The company has $81 million in total liabilities, which seems a bit worrying. It means that the asset/liability ratio is below one. While growth investors may not look at this feature, value investors may pass on this name because of this reason.

In addition, the fact that the largest amount of liabilities represents amounts due to related parties does not help either. This item is worth $54.4 million. Further investigation on this matter shows that Ruhnn Holding sold assets to companies owned by shareholders. This does not look good. While such transactions are very typical in China, investors should get to know them.

Source: Prospectus

The list of liabilities is show below:

Source: Prospectus

Stockholders

The business structure may not be appreciated by the market as there are a large amount of offshore entities owning shares. As shown in the image below, the company was incorporated in Cayman. Shareholders seem to be incorporated outside China. At least three shareholders are located in British Virgin Islands, which is not ideal. Keep in mind that these countries don't provide information about shareholders. The operating subsidiaries are located in China and owned by a company in British Virgin Islands and another one in Hong Kong.

Source: Prospectus

The list of shareholders is shown below. No shareholder seems to control more than 50% stake. It means that the company may not be controlled after the IPO.

Source: Prospectus

Shareholders are less protected in Cayman than in the United States. It should be mentioned as it represents a serious risk.

Securities Law In Cayman

The lines below were obtained from the prospectus. They explain that the securities law in Cayman is not that developed as in the United States. Shareholders may not be able to take action against the company or its directors. In addition, the fiduciary duties of directors may not be clearly established. As a result, the right of shareholders is not as large as in the United States:

Source: Prospectus

In addition, the fact that the company has no assets in the United States means that judges may not be able to enforce actions against the company or its directors. Keep in mind that the assets are located in China. The lines below provide further details on this matter:

Source: Prospectus

Conclusion

Reporting revenue growth of 59% and gross profit of 32%, growth investors may be very interested in the company. Ruhnn seems far away from reaching breakeven point, so value investors are not expected to be interested in this name. The fact that net losses are increasing and the expenses are growing at a higher pace than sales may not be appreciated by value seekers.

The company was incorporated in Cayman, where securities law is not that developed. As a result, shareholders may not be that protected. It is not ideal and may make many shareholders pass on this name.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.